The Fed’s new approach means the first rate hike since 2006 is a long way off, the bank also expects short-term rates to rise a bit quicker in 2015 and 2016 than officials previously forecast. For instance, officials believe the fed funds rate could reach 2.25% by the end of 2016 instead of 1.75% under their old forecast.
In late Wednesday trades, investors reacted negatively to the idea that the Fed could raise rates in 2015 and 2016 a bit faster than Wall Street expected. U.S. stocks slumped and the dollar rose after the move.
In a press conference, new Fed Chairman Janet Yellen downplayed the Fed’s revised rate forecast and said the bank will carefully evaluate a wide range of factors before taking any action.
At its latest meeting, the Fed dropped its 6.5% unemployment-rate target for the first rate hike and said it would look at a “wide range” of factors, including inflation levels and job creation, before charting out a new path.
Yet the bank also stressed that the economy is still running below peak levels and may warrant short-term rates remaining lower than what the Fed “views as normal in the longer run.” A rate of 3.5% to 4% is generally considered normal, economists say.
They took out any numerical thresholds and are basically going to look at everything,They are no longer going to draw any numerical lines in the sand.”
The more fluid Fed approach, however, may make it harder for investors to figure out when the bank will start to raise rates and it could actually inject more uncertainty in financial markets. Yellen acknowledged that the Fed would have to straddle a fine line in deciding when to act.
The Fed vote was 8 to 1, with one dissent. Minneapolis Fed President Narayana Kocherlakota, a leading dove on the central bank, said the Fed weakened its credibility by dropping a firm inflation target.
In a move that was widely expected, the central bank again reduced its bond-buying plan by $10 billion to $55 billion. This is the third straight meeting with a $10 billion reduction.Economists expect the Fed to maintain that pace of tapering unless economic conditions take a severe turn for the worse.
In a statement, the Fed said that in determining how long to keep rates at zero, the central bank “will assess progress — both realized and expected — toward its objectives of maximum employment and 2% inflation.”The Fed said that it will “likely be appropriate to maintain the current target range for the federal fund rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the policy committee’s 2% longer-run goal.”
In 2012, the Fed said it planned to keep short-term interest rates near zero at least as long as the unemployment rate was above 6.5% and inflation cooperated.
In December, with the unemployment rate dropping sharply, the Fed said it wouldn’t consider the first rate hike until “well past” the time when unemployment dropped below the threshold.
The Fed did remove language saying that accommodative policy remains appropriate “for a considerable time.”
Fed officials continue to expect the first rate hike will occur next year. Thirteen of 16 senior officials believe the first increase in the fed funds rate won’t take place until 2015, with rates rising somewhat faster in 2016.
The median forecast for the level of short-term rates at the end of 2015 remained relatively stable below 1%. But the median forecast for year end 2016 was closer to 2.25% from 1.75% in the prior projection in December.
With the health of the economy obscured by the severe winter weather, the Fed made few changes to its economic projections, cutting its estimate for GDP growth this year slightly and trimming its unemployment rate forecast.
The Fed said that economic activity slowed since the last meeting and this was “in part” due to adverse weather conditions.